In the four calendar years since the fall of 2008, the average annual 5-year GoC bond yield fluctuation has been ~125 basis points from high to low (as illustrated in the graph below). These dramatic variances in bond yields have enticed many savvy borrowers to pre-qualify for refinancing or mortgage renewals in an attempt to forward fix their interest rates during one of these downward swings.

Depending on their objectives, apartment owners can begin their refinancing/renewal process up to 1 year in advance of their current mortgage maturity. Some examples have included early prepayment of mortgages to capitalize on current low rates, blending and extending existing financing, hedging interest rates months in advance of upcoming renewal/funding dates, and refinancing with CMHC to achieve the lowest interest rates in the market. In all of these cases, the key is to start the refinancing process early so that borrowers can be pre-approved and poised to capitalize on low interest rates should a favourable swing occur before their funding date. Securing a lower interest rate dramatically improves cashflow, and can mean a difference of tens, even hundreds of thousands of dollars over the term of a mortgage.

Current rates for CMHC-insured apartment mortgages are ~2.05% for five years and ~2.70% for 10 years. Conventional rates start 100 basis points above CMHC, but are often even higher due to the floor rates which many lenders have been implementing lately.

For further information, or to discuss your options for upcoming refinancing or mortgage renewals, please contact:

Bryan Dudley
604.662.4812
bryan@realtechcapital.com

or

James Paleologos
604.662.4811
jamesp@realtechcapital.com

British Columbia residents typically sit back and watch, read and discuss catastrophic global events of natural occurrence. West Coasters feel somewhat immune to these disasters. Well, prepare yourself for a reality check!

Major Earthquakes in British Columbia

Since 1872, the Canadian Earthquake Epicenter File has registered more than 8 significant earthquakes (6.5 magnitude or greater) on or off the coast of British Columbia and more than 200 between a magnitude 4.0 to 6.0.

We need only reflect on days gone by to our neighbors in California to realize that we too are extremely vulnerable to major natural disasters.

Flooding in British Columbia
Major flooding is a normal occurrence in many regions of British Columbia.

Next time you are in the Fraser Valley go looking for smooth round rocks. Where do you think they came from and where do you think all the fertile soil came from?

Richmond, for the most part, is below sea level and protected from the onslaught of the Pacific Ocean only by dykes.

Delta, British Columbia for the most part hovers around sea level.

Insuring for Natural Disaster
Insure your buildings for their appraised replacement cost value + an additional 10% for the unknown factors. Always insure for: All Risk protection including Blanket By-Laws 100%, Earthquake & Flood.

For further information on correctly insuring apartment buildings, please contact:

Scott Jamieson, Risk Manager
AC&D Insurance Services Ltd.
Email: sjamieson@acdinsurance.com
Ph. 604-982-1039

Two planned rental apartment buildings that are part of Intracorp’s MC2 project at Marine and Cambie in Vancouver have sold for $27 million to a prominent, private local group with significant rental and commercial holdings, said Mark Goodman, who sold the property with his father David Goodman.

This is the first pre-sale purpose-built rental apartment sale in recent times, said Goodman, commercial realtor, co-founder of HQ Real Estate Services and co-publisher of the Goodman Report. Intracorp is still responsible for building the buildings, Goodman said, and they should be completed in 2015 or early 2016.

“This has not been done. We’ve never heard of a commercial rental property being pre-sold,” Goodman said.

“We’re selling a concept. There is a leap of faith for the buyer, but there is a rental shortage across the city. People trust Intracorp — they have a stellar reputation.”

The rental buildings are at the north and south ends of the project, with a four-storey, 41-suite building at the north end and a six-storey, 69-suite building at the south end.

When complete, the megaproject will also feature 443 market condos in two towers, 25 and 31 storeys high, situated across the street from the Marine Drive Canada Line station and the planned Marine Gateway development.

The average suite in the building will be 540 square feet and will rent for about $1,350 per month, Goodman said. There will be bachelor suites, one-bedroom suites and a few two-bedroom suites.

“It’s going to be a beautiful development with high-end finishings,” Goodman said.

The asking price was $30 million, and the projection is that the buildings’ owner will receive a 4.75 per cent rate of return each year, Goodman said.

To read more, click here.

City pressed to increase affordability by ending low-rise demolition moratorium

Developers are pushing the City of Vancouver to help solve the city’s affordable housing crunch by ending what is effectively a ban on demolishing and rebuilding low-rise rental buildings in the West End.

“It’s a policy that is prejudicial. It’s heavy-handed. It’s punitive and it’s unfair,” said HQ Real Estate Services principal David Goodman, who along with son Mark Goodman also publishes the Goodman Report newsletter. “Many of these buildings are 60 years old and older. They need to be refreshed.”

In 1989, Vancouver city council implemented what it called a “temporary moratorium” on demolishing rental buildings in the West End. It changed the ban to a “rate of change” restriction in 2007 that allowed rental buildings to be torn down as long as they were rebuilt with the same number of units as they had before – a restriction that makes rebuilding a residential building uneconomical for developers.

The city also expanded the “rate of change” program to include similar regulations in other multi-family neighbourhoods, such as Kitsilano, South Granville, Kerrisdale and Marpole. Staff told council in 2007 that the new regulations would stay in effect for two and a half years, Goodman said. Instead, six years later, they remain in effect – something that keeps property owners from both maximizing their property’s value and helping solve the city’s scarcity of affordable housing, he added.

But councillor Raymond Louie defended the city’s rate of change policy by pointing at the negative impact of higher density in multifamily neighbourhoods:

•shade and view blockages;

•a drain on city services such as sewer and water; and

•traffic havoc.

He then listed what he called the city’s successful efforts at generating rental housing:

•1,023 units built in projects under the now-defunct shortterm incentives for rental (STIR) program as well as 544 rental units related to STIR that are working through the system;

•almost 200 units thus far under the city’s new Rental 100 program as well as enquiries related to building 1,072 units; and

•614 units under construction at the Aquilini Group’s rental-only project near Rogers’ Arena.

“We’ve got a number of programs in place and want to see what effect they will have.” Louie added that he is open to reviewing the rate of change policy but “at this point, it’s not timely, given that we have other programs in place.”

Both Urban Development Institute Pacific Region CEO Anne McMullin and MacDonald Development Corp. principal Rob MacDonald believe the city is reluctant to allow higher density on sites where there are old walk-up buildings because displaced tenants might complain about the city’s complicity in having them kicked out of their homes.

But they said that concern can be mitigated if developers compensate tenants fairly.

“I’m for a program where if you wanted to demolish an existing building, existing residents would be compensated based on a fixed formula,” said MacDonald, who has bought and sold many West End buildings.

“The city could mandate that tenants get something simple like one or two months’ compensation for every year that they’ve lived in the building or a few thousand dollars for moving expenses.”

McMullin, whose organization speaks for the development community, said developers have not yet reached a consensus on what fair compensation for tenants should be. She said one idea is to allow tenants to return to a suite on the redeveloped site with the same rent as they had in the building that was torn down.

“There are a lot of ways to creatively come up with solutions to look after existing tenants.”

Click here to download the PDF version of the full article in Business in Vancouver February 5-11, 2013

Surrey has a good start on its City Centre district and work is expected to accelerate.

To read more, click here.

At this year’s Annual Industry Forecast Luncheon of the Urban Development Institute – Pacific Region, 1100 guests heard moderator Diana McMeekin of Artemis Marketing coax a largely optimistic outlook from the panel of industry leaders, punctuated by some entertaining rants on world economic conditions, hysterical media and the prospect of political change.

Before moving onto more specific questions for individual panelists, the proceedings started with each being asked to answer the question “What’s in store in 2013?” for their respective areas:

Office & Industrial Markets: Tony Astles, Executive Vice President, Bentall Kennedy

Tony generally has a positive outlook for the year ahead. While not budgeting for strong growth, the downtown Vancouver office market is stable and there is a current lack of space. The office buildings currently under construction downtown will serve to meet pent-up demand, and Tony does not believe that there will be rent relief until 2016. Tony predicted that current rents downtown are higher than they will be in the future – and that rents will decrease as the market matures. Tony noted that speculative building is very risky, and that any future construction will require current demand and flawless execution. In terms of markets outside downtown, Tony predicts Richmond will be slow and steady, while Burnaby and New Westminster have too much speculative product. Generally, there is a lot of product available in older buildings, industrial space is no longer a commodity, and multi-family rental product has been good on a risk adjusted basis. Tony expects market stability in the year ahead.

Retail & Commercial Markets: Eric Carlson, President & CEO, Anthem Properties

In looking back at the past three years, Eric noted that the market worldwide has been a grind. He commented that the new normal is permanent malaise, with the media constantly fueling the negativity. However, Eric predicts that “2013 is the year the fear factor goes away”. Eric believes that the U.S. housing market recovery, immigration returning in 2013, and low unemployment rates should all result in a positive outlook in 2013. The outlook for the world as a whole is much better than it was last year – and that will translate to British Columbia this year, resulting in an increase to the BC economy in the last half of 2013.

Residential Market: Colin Bosa Chief Executive Officer, Bosa Properties

Colin noted that over the last three years the residential market has been relatively strong. Low interest rates have helped demand despite the new CMHC rules, and 2009 marked a 15-year high in net immigration. Colin stated that we are now moving from a seller’s market to a more balanced market. He said “The good news for all the salespeople in the room is you’re going to sell lots of real estate, but the bad news is you’re going to have to work at it.” At a local level pre-sale and standing inventory is mixed across markets within Greater Vancouver. Downtown and Lougheed continue to be good markets, as does Metrotown, with low supply and healthy buyer demand, while Southeast False Creek and Coquitlam Centre have many unsold units, putting downward pressure on prices there. Colin believes that values will return in Coquitlam with the construction of the Evergreen Line. While there is a lot of product in the pipeline in Burnaby, lenders will serve to regulate supply with tightened rules. Colin stated that developers must know what they are doing and won’t be able to cover up mistakes with price increases. Overall, Colin believes that if you are rational with your land price, then everything should be alright this year.

QUESTION FOR ERIC CARLSON:

Although you’re here representing the retail and commercial sector, Anthem does have significant mixed use/residential projects. What is your view on 2013? Is today a good time to buy a new home in Metro Vancouver?

Eric says that “of course” 2013 is a good time to buy a home in Vancouver and said that from his perspective, the idea of a housing bubble is nonsense. He said that most of the media hysteria is caused by “the same three Toronto journalists who hate Vancouver” using hyperbole rather than data.

He said that the population dynamic of BC is demographically focused on Vancouver, which tends to experience population growth of 50,000 people per year, translating to about 20,000 new homes and new households. There is not much overhanging or overbuilt inventory in Vancouver and, from his perspective, there is equilibrium in the market and not imbalance.

Having some extra product on the market is not an imbalance and generally speaking, and agreeing with Colin Bosa, developers have self-discipline and have shown the ability to turn the taps off or pull the reigns back if need be. Developers only come to market if they’re confident they are going to sell.

To sum up, Eric said that he does not think there’s a bubble. He noted that interest rates are historically low and predicted that they will creep up 50 basis points by the end of the year. He ended with a reminder that new home buyers should buy before April 1 to take advantage of the BC government’s $10,000 HST incentive.

QUESTION FOR TONY ASTLES:

There are three buildings under construction in downtown Vancouver, and three further buildings have been announced. What do all these new buildings mean for absorption in the office market, and what does it mean for this year and years ahead?

Tony first mentioned that when analyzing the downtown office space market absorption numbers, it’s not helpful to look at the averages due to high volatility. He instead suggested looking at the mean absorption numbers, which have typically been in the range of 300,000 to 500,000 s.f. of absorption a year.

The downtown market is approximately 3-4% vacant. With the addition of the 3 buildings “with shovels in the ground”, an extra 1.5 million s.f. of office will be added to the market of approximately 24 million s.f. downtown. By Tony’s calculation, this is an addition of 6%. At the very worst, if none of the new space got absorbed, we would see a 10% vacancy rate, which is a normal level of vacancy. However, the new space will be a problem if additional buildings come onto the market without pre-leasing commitments.

Often people wonder about what happens to old buildings when new buildings come onto the market, but Tony noted that most of these spaces have actually been recommitted to new tenants.

Ultimately, Tony’s view is that the downtown office market is okay for now but could experience problems if the economy turned or if the 13 sites currently designed and planned for downtown were to go ahead. The fundamental fabric of downtown Vancouver will not change and the 300,000 to 500,000 s.f. of absorption will remain the same so there is no demand for this amount of new space. He said that as long as developers are rational, the 13 new sites will not be built.

His parting line on the downtown office market was that it will be okay as long as everyone is reasonable.

QUESTION ON CAPITALIZATION RATES:

Cap rates are at historic lows. Will they compress further and why are people still buying?

Tony Astles:

Tony agreed that absolute cap rates are low but said this is reasonable when they are viewed in comparison to bonds, which has been one benchmark used to analyze cap rates over the last 20-25 years. Tony said that based on the traditional spread over bond rates, the lower cap rates we are seeing in the 4.7-5% range are consistent and “in the zone” with bonds.

As to whether cap rates will continue to go down, Tony noted that a downward trend would require an increase in rents, which the market probably cannot support. Similarly, he said that cap rates will not rise either because that would require interest rates to go up and (among other reasons) Canada could not afford the export loss that would occur if we increased our interest rates. Tony concluded that cap rates will remain the same this year.

Eric Carlson:

Eric predicts that the economy will pick up in 2013, indicators will look better, and people will start to put their money in places other than real estate. As capital leaves real estate it will put upward pressure on older buildings in the hinterlands of BC where there is more “B” and “C” class product. There will be less of an impact in the urban areas with high quality real estate. For good quality real estate that can “pretend it’s a bond”, cap rates will stay at 5%.

QUESTION FOR COLIN BOSA:

Are you worried about the flow of capital out of China drying up?

Colin answered this question with a story from personal experience that exemplified to him that unless Canada goes into a recession or our government changes its immigration policies, the flow of capital from China will not dry up. He has noticed that many Chinese citizens simply do not trust their government and are trying to place their money outside mainland China as a result. Further, he said that BC, and Vancouver in particular, has shown itself to be a comfortable place for Chinese immigrants in a variety of ways, which continue to promote the flow of capital from China.

QUESTION FOR ERIC CARLSON:

Is conventional commercial retail in “complete disruption” with the increase in online shopping, and what does this mean for the retail market?

Eric said that with the increase in internet shopping, retail is going through significant change but (admitting he may have overstated this on a previous occasion) it’s not a “complete disruption”. Most of the change is positive – in many ways “it’s the best of times and the worst of times”.

On a global level, consumers have become more cost conscious and are downgrading their purchasing choices (i.e. going to Whistler but having pizza rather than steak, beer rather than scotch). Retailers have had to find new ways to do business and this has manifested in new building formats, customer experiences and the behaviour of tenants. Retailers are different now – big national tenants are no longer driving growth and it now takes longer to get a lease deal in place (or as Eric put it, you now need “final, final double back flip executive authority” and even that can take a year or more to obtain). This, of course, creates uncertainty.

At the same time, the changed formats (including reduced amounts of space required by retailers) means opportunity. Every generation means a new way of doing business, and retail has seen the transition from shopping centres to power centres to online shopping. Amazon is now one of the biggest retailers in the world and Best Buy is no longer a “rock star category killer tenant”. In addition to online retail, there is a move now to “experiential stores” like Apple and real estate developers are creating different types of buildings (primarily mixed use) to make things work in this changing market.

QUESTION FOR COLIN BOSA:

What was your best business lesson through the economic crisis?

Colin explained that, ultimately, the best business lesson he learned is that good real estate is always good real estate. You should buy good real estate at a fair price and hold it for the long term.

QUESTION FOR TONY ASTLES:

Can you comment on Development Cost Charges and Community Amenity Contributions?

Tony acknowledged that cities do have to plan for future growth and they do not want to put the entire burden of growth on the taxpayers. As a result, they try to estimate the costs and ask the developer to pay up front, as well as to share some of the lift that comes as a result of re-zoning.

In commercial buildings, there’s a massive amount of capital required with a small yield. When the up-front cost at the municipal level is too high, developers will back off until the risk factors decline. Cities need to appreciate that when a tower does get built, they enjoy a substantial dramatic increase in property taxes payable every year for the next 40 years. Tony also recognizes that it’s very difficult to find the right balance but it is important because the overall cost to the developer can have a substantial effect on the development and/or the developer’s willingness to proceed with a project.

Tony also discussed the fact that CACs increase the element of risk and have become a big issue because they represent an unknown cost until the end of negotiations with the city. Developers need to know how CACs will be charged and in what amount before they start getting involved with their site and this has been encouraged by comments in that regard from the City of Vancouver’s new Director of Planning, Brian Jackson.

QUESTION ON THE ELECTION:

Politics – are you making any adjustments to your business in light of the upcoming election or would you otherwise like to discuss the election?

Eric Carlson:

Eric said he was reluctant to address this issue because of the negative energy it can create. He noted that last year, he and fellow panelist Rossano de Cotiis took a practical, business-like approach to this question and “took some heat” from their peers in the real estate industry. This year, he noted that although he has had excellent interaction with NDP-aligned politicians at the municipal levels, he is concerned that at the provincial level (and with the election imminent) the NDP are potentially about to take the reins of “the vast levers of fiscal policy, taxation, public sector unions, etc.” and he worries they are unqualified to do so.

Colin Bosa:

Colin confirmed that his company is focused on the long term and will not change the course of their business because of the election. Their business relies on population growth, which is driven by the market, policy and economy. He said no matter who the next provincial government is, they need to realize that real estate is a big part of BC’s economy and focus on keeping international immigration and inter-provincial in-migration constant.

Tony Astles:

Tony said that the office sector is a bit different than the other ones and noted that world economic factors have a larger impact than a change in provincial governing parties does. Typically, leases run 10 to 15 years and any company with a large number of employees will be reluctant to move their operations as a result of a change in the governing party. However, he did note that the industrial sector is more mobile than the office sector and so there may be some movement in that area. He said that in his business, they focus on the long term and have a found a way to make things work in every cycle.

Why do you continue to be bullish despite media headlines predicting the demise of the residential market?

Colin noted that although there is some truth to the correction in prices in the Lower Mainland, most of this is based on the price of a single-family home on the West Side. Because prices for these particular homes escalated at unsustainable rates, it was not surprising that the price point for this product needed a breather. However, Colin was quick to point out that this cannot be extrapolated to the residential market as a whole. Developers are building to long-term averages, interest rates remain low, and there has been no run up in condominium prices in the same manner as there was for the single-family West Side home. Colin does not see the bottom falling out on condominium prices unless migration numbers decrease dramatically.

Closing comments/parting shot

Eric urged everyone in the room to vote and to get everyone they know to vote in the upcoming provincial election. As to how Eric feels they should vote, it will likely suffice to report that he likened Christy Clark to noted optimists Winnie the Pooh and Aristotle, and Adrian Dix to pessimists Eeyore and Frederick Nietshce and called Gordon Campbell BC’s best premier.

Prices and total sales are up, but the number of transactions is falling. That’s the picture of Vancouver’s apartment building market, according to the Goodman Report, produced by David and Mark Goodman.

In 2012, both over-all dollar volume and the average price per suite hit record highs, David Goodman said in the report. The number of building sales is down 17 per cent in 2012 from 2011, but Goodman said this is not for a lack of buyers.

“Major apartment offerings in Greater Vancouver continue to garner widespread investor interest,” said Goodman, a realtor at HQ Real Estate Services Inc. “Spurring demand have been the endlessly low mortgage and vacancy rates, the solid economy, high housing costs, the scarcity of supply, and Vancouver’s world-class image.”

Anthio Yuen, senior research analyst at CBRE commercial real estate advisory firm, agrees.

“There is a lot of demand for rental apartment buildings in Vancouver, but not a lot of active sellers,” Yuen said, adding that there is not much new supply either.

In Metro Vancouver, a total of 92 rental apartment buildings changed hands in 2012. The sales were evenly split, with 46 buildings selling each in Vancouver and the suburbs, the Goodman Report found. Those buildings sold for a total $683.7 million, up 17 per cent from 2011, while the average price per suite in those buildings went up 16 per cent to $264,980 in Vancouver and increased 14 per cent in the suburbs to $202,224, the report found.

Goodman said investors are reluctant to sell apartment buildings because they are a safe investment.

“The conundrum is: Now that I’ve sold my asset, how do I replace this with a conservative investment where I can sleep at night?” Goodman said.

Scott Brown, senior vice-president of residential project marketing at Colliers International, said potential buyers outnumber sellers for many types of property.

“Vancouver certainly has more prospective buyers for A-Class locations than sellers,” Brown said. “This is true for land and development sites in great locations too.”

The typical apartment building investor is in it for the long haul and will keep the building 15 to 30 years, Goodman said.

“It’s typically patient money that goes into apartment buildings. These are not people who are looking for instant gratification,” Goodman said.

Yuen agreed, saying that small swings in the residential real estate market would not influence investors in apartment buildings.

There were three major sales in 2012, worth more than $55 million each, which bolstered the annual numbers, Goodman said.

“There is growing evidence — from an inconsistent and varied range of 2012 pricing patterns — that the year-to-year average price trends showing constant and predictable increases over the past 10 years may no longer be sustainable in the near future,” Goodman said in the report. “In view of an 11-year ‘bull run’ behind us, the likely return of an NDP government in B.C., and the probability that interest rates may increase in the near future, we shouldn’t discount the possibility of a pricing plateau.”

Goodman said he expects interest rates will stay low for another 12 to 18 months. He said the typical annual yield for an apartment building is between 2.5 and 4.5 per cent, not accounting for mortgage payments, income taxes or capital gains that would be realized if a building is sold.

The vacancy rate in Metro Vancouver is about 1.8 per cent, while during the financial crisis of 2008, it fell to just 0.7 per cent, Goodman said.

“The rental market strengthened and more people stayed put in their rental apartments because they were afraid,” Goodman said. “There’s a direct correlation between the fears of a financial meltdown and an individual’s desire to buy a house or a condo.”

Meanwhile, as sales of single condominiums and single-family houses slow, and cities provide some motivation to builders, developers are starting to build purpose-built rental suites, a trend Goodman expects will continue into 2013.

“If the rental income is higher and the cities are granting some concessions with density or parking, the combination is allowing for the development of rentals where the numbers are actually beginning to work,” Goodman said. “This is unprecedented and breathtaking to imagine that in Vancouver, you could actually make the numbers work. But the cities are finally coming around — they’ve always been reluctant to grant any type of incentives. Now they’re saying we better do something about rental housing, so they’re lightening up a bit.”

Yuen said he doesn’t expect a boom in purpose-built rentals, but that each developer will decide on a site-by-site basis. “Building purpose-built rentals in Vancouver is quite tough … because the numbers don’t always make sense,” Yuen said.

Examples of purpose-built rental projects include on at 275 Kingsway by Edgar Development Corp., Orr Development Corp.’s five-storey building of 83 suites plus commercial space at 3002–3036 West Broadway and Yenik Realty’s 41 suites at 4320 Slocan. There are many others incorporating some rentals into their projects.

Click here to download the PDF version of the full article in The Vancouver Sun January 22, 2013.

The final numbers are in! Our latest Goodman Report: 2012 – Greater Vancouver Apartment Building Market Review provides an in-depth analysis of the apartment market. We looked at this past year’s performance vs. 2011 and published the sum total of all 2012 building transactions.

Furthermore, we reviewed CMHC’s rental market report, commented on the emerging trend of new rental construction and offered an alternate strategy for Vancouver’s affordable housing crunch.

Finally, we provided a 2013 market forecast and indulged ourselves with a nostalgic journey down memory lane celebrating 30 years of publishing The Goodman Report.

Download the exclusive report here >>

Buildings, like cars, are depreciating assets and require ongoing regular maintenance throughout their service lives. With neglect, the cost of repair compounds over time, becomes onerous, and may eventually exceed the cost to demolish and rebuild. Conversely, with care and attention, buildings can exceed their expected lives. Proactive maintenance not only mitigates known problems but can help owners identify other problems sooner through passive review.

Acquiring basic understanding of building systems is the first part. Start by reading the maintenance manual. This provides a general understanding of the systems, materials, expected service lives of components, and required maintenance intervals. A building owner must also plan for the eventual renewal or replacement of systems as they inevitably reach the end of their lives.

Deciding when it is time to renew or replace a particular building envelope component is not always cut and dry, as wholesale failure of an entire component is not that common. Typically, systems fail slowly over longer periods of time. This slow mode of failure lends itself to deferral of work and increased repair costs because of damage to materials protected by the envelope. An owner will often project for the eventual replacement of components by establishing a long-term capital plan (10 to 30 years). As the planned expenditure moves into the short term (five to 10 years), the owner should complete a focused assessment of the component to get an accurate idea of timing. This allows the owner to prepare for the large capital expenditure and maximize the service life of the component without deferral of work and maintenance.

Deferral of work is often rationalized so: “Why pay $x now for maintenance when I am going to have to pay $xxx to replace the whole system in the near future anyway?” This mindset is risky because of the potential damage to the underlying materials: corrosion of steel, wood rot, deterioration of concrete and issues of fungi or mold. In the absence of a working capital plan, work can be deferred only if the problem is understood and precautions have been taken to limit future damage.

This is particularly true for the parking levels of a building. These systems are often the most neglected and yet are subject to harsh exposure conditions. Vehicles track in road salts (chlorides) that migrate into the exposed concrete surface and that, when combined with moisture and oxygen, corrode the reinforcing steel. Left unaddressed, corrosion-induced deterioration can have large financial implications as the extent and thus cost of repair escalate exponentially. Although building codes began addressing durability of parking structures in the early 1990’s, durability standards are not retroactive, and a large portion of our building stock was constructed prior to that time.

Take for example a parking facility building that was relatively well maintained as of 1987. A structural condition evaluation performed in 1998 detected approximately $15,000 of repairs. No repair work was undertaken. In 2005, the structure was re-evaluated, and the value of the repair work had increased by approximately 400% to $60,000, primarily because of increased deterioration.

The first step in catching up on deferred maintenance is to schedule a building condition assessment that would prioritize the repairs and include opinions of probable cost to address the items requiring repair and maintenance. Once repair or renewal work is complete, the maintenance and capital plans can be updated.

Greater vacancies, greater demand
Vancouver apartment vacancies increased in 2012, according to the latest Canada Mortgage and Housing Corp. (CMHC) report issued last month with figures compiled in October.

The development would be good news if vacancies weren’t still so low compared with demand.
CMHC pegs vacancies in purpose-built rental apartments in the Vancouver CMA – the census area approximately the same as Metro Vancouver – at 1.8% in October 2012, up from 1.4% in October 2011. (For condos, the vacancy rate edged up to a mere 1%.)

The increase happened even as the demand for rental housing increased, according to CHMC’s analysis.

“Approximately 3,606 more rental apartment units were occupied in October 2012 than a year earlier,” the report stated, an increase that was nearly 10 times that of the increase in the overall stock of rental apartments during the same period. Between October 2011 and October 2012, the number of apartment units in the Vancouver CMA increased by a mere 386 units.

“Most of the supply increase was in the secondary rental market,” the report noted. “For the purpose-built rental market, some of this increased supply was new-construction units, but most were units that were added back into the rental pool after renovation and/or repurposing.” (CMHC noted that repurposing could mean the unit was converted to a condo and then redesignated for rental use.)

The steady demand translated into a rise in average rental rates across the region.

Rents for three-bedroom units typically dropped more than those for smaller, less expensive units (save for Mount Pleasant, where CMHC reports a stunning 18.7% increase in average rents for units with three bedrooms or more, as well as Marpole and South Granville, where increases were in the 10% range).

Overall, however, average monthly rents reported by CMHC increased to $1,047 from $1,027, a rise of approximately 2% between October 2011 and October 2012.

Record sales volume
Tenant demand buoyed investor demand for multifamily properties, with preliminary figures from veteran apartment broker David Goodman indicating a record-breaking year for apartment property sales.

The aggregate dollar volume for 2012 approached $662.7 million, sweeping aside the previous record of $648.5 million set in 2005. The tally was made possible by three major sales in excess of $55 million each, which helped boost transaction values despite a drop in transaction volume to 92deals. By contrast, 111 deals completed in 2011 and, in 2005, 162 deals closed – 76% more than in 2012.

Goodman noted that low interest rates continue to play a role in spurring investor interest.
Ongoing low vacancy rates and limited new supply – a fact borne out by the recent CMHC rental market report – also buoy investor demand.

On the other hand, Goodman is cautious regarding the prolonged period of low interest rates and run-up in prices. Neither phenomenon can last, and combined with the possibility of the BC NDP assuming power in May’s provincial election, might herald a plateau in the market.

Buy or rent?
This columnist jumped into the property market three years ago with a two-bedroom apartment in Mount Pleasant. The mortgage payments at the time were on a par with where rent was heading, so the move made sense. Despite increases in strata fees and property taxes since, the move continues to make sense – perhaps more sense than ever.

Tallying mortgage interest, property taxes, strata fees and assessments, as well as home insurance paid in each of the past four years versus rent and home insurance paid in 2008 (the last full year in which rent was paid) shows that home ownership has steadily cut household expenses. Preliminary figures for 2012 indicate savings on housing costs of more than 20% versus 2008.

Poor affordability tends to give first-time buyers in Vancouver fewer options than those in other cities, but the pay-off – for those who can manage it – is significant.

So long as mortgage costs remain in check, the payoff seems set to continue, but low interest rates and increases in rental costs have so far put accounts in this buyer’s favour. (The exit strategy and ultimate return on investment is a significant risk factor, of course, but we’ll leave that matter for another column.)

Click here to download the PDF version of the full article in Business in Vancouver January 8- 14, 2013